Uber Expensive: the Economics of Surge Pricing

Recently, on-demand car service company Uber has received a lot of negative attention from passengers who “unwillingly” spent hundreds of dollars on a car ride during Halloween due to surge pricing (I put “unwillingly” in quotations because the app explicitly tells you if and by how much fares are higher than usual). In fact, a woman named Gabrielle Wathen successfully crowdsourced her $327 Uber bill on Halloween night. She wrote on her GoFund.me page titled “Uber Stole my 26th Birthday”:

Last night was Halloween. Great time. Today is my 26th birthday. Not so great time. I feel taken advantage of and cheated by the Uber name. $367 for a 20 minute ride should never be justified, even on Halloween. Please donate even just $1 if you think this is utter and complete bullshit and also hilarious and very, very depressing at the same time.

Remarkably, in the matter of only 16 hours, 21 people donated a total of $583 dollars to her “cause”–$221 more than the ride itself. Based on that alone, it’s clear that others share her grievances. In fact, the Better Business Bureau gave Uber an “F” rating due to the amount of complaints they receive about surge prices. Last New Year’s Eve, one man adamantly complained when he was charged $63 dollars for a .73-mile trip. Yep. I’ll give him the benefit of the doubt and assume that he was unable to walk that distance, but clearly, Uber can get away with a high price for convenience.

Although this is an issue that infuriates and confuses many people, it can be explained through basic supply and demand. Uber is fundamentally a marketplace where the company itself does not control supply, but rather the independent contractors and transportation providers that work for it. This means that the supply curve is of the basic upward-sloping variety. During times where demand for a driver is increased, such as Halloween, New Year’s Eve, and other party-centric times, demand substantially exceeds supply. Artificially bumping up the price intentionally reduces demand, which ideally leads to a more equal amount of suppliers and demanders in order to assure all riders who have a higher willingness to pay get a ride.

Uber isn’t the only car service that is using this dynamic price-setting model. In fact, it is beginning to run down the taxi industry due to its higher accessibility for both suppliers and consumers. While taxis are virtually a monopoly regulated by the city with many rules and barriers to entry, it is relatively easy and more desirable for someone in the profession to become a contracted Uber driver. Due to Uber’s smartphone app, it is almost effortless to pre-arrange a car. In addition, the transaction is cashless because members put their credit card information onto their account, making the process preferable to taxis. In addition, although surge prices are an issue, they only happen to about 10% of rides. On average, Uber claims to charge 30% less than a taxi. Letting the market rule has proven to be wildly successful.

Moral of the story: next time you’re fantasizing about watching Netflix in your bed at a lame party far away from your house, look at the fare markup before you press the “Request Pickup Here” button. If you’re mad at what you see, you can ease the anger by remembering that it’s due to a natural economic phenomenon.

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